The second Service Supply Chain Thought Leaders Forum built on the foundation laid by the first. Participants discussed progress toward a new customer service paradigm of multifaceted, long-term asset management. Panelists shared both company-specific and sector-wide strategies for streamlining the service supply chain to add value by rethinking business models, redeploying resources, and integrating cutting-edge technologies.
Panel I: Functional/Business and IT Challenges for Implementing a Service-Centric Competitive Strategy (moderated by Hau L. Lee, Stanford University)
Joe Chamberlain of KLA-Tencor addressed cost-optimization problems in the semiconductor equipment industry (a low-demand, highly uncertain environment with catastrophic down-time costs and an extremely narrow customer base). KLA’s service-revenue contribution had been rising, and the company set itself the ambitious goal of achieving service revenue on par with product gross margins. KLA reduced expenses on excess inventory from 37% to 8% by investing in state-of-the-art tools to optimize resource allocations and manage material flows, merging its stock-planning and execution-capability systems.
Rapheal Holder of Northrop Grumman (an aerospace-defense contractor) is seeing rapid expansion in the service component of his company’s business. Service now accounts for 30% of revenue, and increasingly includes asset management of other manufacturers’ products. In this industry firms must follow the product into the field, complicating support delivery. NG is implementing a new end-to-end service logistics model, TSSR (Total Systems and Support Responsibility), that offers customers ‘one-stop shopping’ for service support. For example, NG is assuming increased responsibility for the US Navy’s maintenance, overhaul, logistics, and information services.
Eileen Long of IT provider Unisys described the evolution of her company’s strategy to offer more innovative, value-added services as Unisys’ core products are commoditized (paralleling NG’s shift). Once a manufacturer of mainframe computers and more recently a parts supplier, Unisys has become primarily a service company (currently 76% of revenue). Earlier partnerships with OEMs to provide product-maintenance support have evolved into such high-value services as remote network management, remote help desk management, deskside support, and infrastructure consulting services. Unisys measures its service supply chain’s performance by tracking improvements in customer satisfaction as well as on its balance sheet.
Dillard Myers stated emphatically that customer satisfaction is the top priority at network solutions company Cisco Systems. Nineteen percent of the company’s revenue is derived from high-margin services, which range from technical support to advising and are increasingly being bundled with products. With its customers’ capital expenses flat and their expectations rising, Cisco is under pressure to lower its operating costs through process improvement. The company is moving toward market segmentation and customer service-offering differentiation (e.g. two-hour, four-hour, and next-day service contracts). Data needs to be tracked at the serial-number level ‘from cradle to grave.’
Discussion began with Hau Lee’s asking whether companies’ increasingly complex service offerings were adequately supported by IT and accounting systems. The panelists all felt that better systems integration and more sophisticated tools were needed. Audience members concurred that IT is often an afterthought and that a tremendous amount of data goes unanalyzed. Panelists addressed reverse logistics at their companies. Attendees observed that prioritizing process change vs. IT implementation is a ‘chicken and egg’ question as companies face shrinking profit margins with the commoditization of the service supply chain.
Panel II: Challenges and Opportunities for Redesigning and Restructuring the Service Supply Chain as Part of a Service-Centric Strategy (moderated by Marc McCluskey, AMR Research)
Jon Guyett focused on delivery company DHL’s efforts to measure entitlements at individual customer locations. If this data can be tracked it will lead to differentiated service products (such as Cisco has begun offering). As a third-party logistics (3PL) provider, DHL can support a higher level of collaboration, coordination, and pooling within the service supply chain. The company’s single biggest challenge is managing disparate activities across its supply chain. He observed that what’s profitable today may not be profitable tomorrow, so that there is a broad strategic imperative to pay attention to what the company’s core business actually is at any given moment.
UPS’s Carl Strenger noted that the service supply chain is the last frontier of business opportunity. UPS is seeking to differentiate itself on customized, customer-driven delivery services, not simply on price. Logistics providers spot trends in commercial activity (e.g. inroads into traditional retailers’ market share by Amazon and eBay and the move to contract manufacturing); there is a shift from just-in-time to just-in-case inventory-management practices. Like its competitor DHL, UPS is increasingly acting as Lead Logistics Provider, coordinating multiple 3PL providers. These firms are learning to share information and resources to meet customers’ needs.
Brad Berkson of the Department of Defense described the evolution of the military’s increasingly strategic, results-oriented weapons supply chain. The focus is now on weapons systems (i.e. on procuring capability, not just buying parts). If service performance is measured as system availability, there is a direct trade-off between investing in plane capacity or in service parts. The DoD is using PBL (performance-based logistics), commercial ERP (enterprise resource planning) software, collaborations, and new technologies such as RFID (radio-frequency identification; see Daniel Connors’ presentation. Synchronization during deployment is critical, requiring OEMs to restructure their service supply chains to track ‘power/mission capability’ hour by hour.
Discussion raised such basic questions as how to build a service supply chain and what models to base it on. Forming business partnerships was cited as a compelling competitive strategy, as was having detailed knowledge of one’s customers. There was consensus that with the growing importance of after-sales information the analytical tools available to study this data are inadequate. Participants expressed different views about ‘product lifecycle’ vs. ‘service lifecycle.’ Morris Cohen wondered whether there is a positive correlation between the increased role of service strategy and the shift toward logistics outsourcing.
CEO Roundtable (moderated by Ted Rybeck, Benchmarking Partners)
This was a lively exchange of views on service supply chains from the top, with panelists concurring that SSCs are now integral to enterprise success.
Ken Wykle of the National Defense Transportation Association spoke about the military’s greater reliance on the private sector to support efficient deployment of its resources. He stressed the importance of detailed and granular logistics information (‘precision logistics’) obtainable with innovative technologies. Given the extreme complexity of military supply chains in mission-critical operating environments, processes must be standardized across organizations.
Rockwell Automation’s Keith Nosbusch said his industrial-automation company embraced continuous change, and that its traditionally product-centric, “break it, fix it” culture was becoming more service-driven as service revenue grew. Given the rapid commoditization of many products, service shipped with products is a key differentiator in gaining and retaining customers. He emphasized the role of preventive and predictive actions to enhance service support (e.g. the use of CRM [customer-relationship management] software).
Michael Capellas of telecommunications provider MCI declared that a pure-service profit-and-loss statement is nonsense because all products are bundles of goods and services, making it impossible to discriminate both relative costs and value-creation effects. Remarkably, despite MCI’s current problems (bankruptcy, etc.), revenues have not declined and customers have remained loyal due to MCI’s superior “customer touch.” It’s more important than ever for MCI to be able to quantify service levels in order to extend its customer lifecycle.
Ralph Roberts remarked that service has grown into the primary concern at the cable company Comcast, which operates in an industry notorious for its lack of attention to customers’ needs. Comcast is working to bring decision-making as close to its customers as possible. Call centers are being decentralized, for instance, and expanded self-service options are becoming available to subscribers.
Panel III: Transformation of the Service Supply Chain Enabled by Technology (moderated by Ann Grackin, ChainLink Research)
Luke Gill represented aircraft manufacturer Lockheed Martin’s autonomic logistics program. This is an exciting frontier for the service supply chain because it integrates service with physical product in cutting-edge ways. IT infrastructure plays a critical role here: 65% of the division’s budget is spent on support systems. The increased reliability of aircraft with built-in monitoring and diagnostic capabilities leads to streamlined engineering (e.g. the new F-35 Joint Strike Fighter will need only a single engine). For the F-35 LM used advanced e-commerce tools and supply chain planning software to provide total asset visibility and facilitate inventory pooling from multiple vendors.
At IBM’s Watson Research Center Daniel Connors is exploring RFID tracking technology, which uses remote identification devices to locate and monitor the health of items as they move through the supply chain. Although it’s too early to assess RFID’s applications potential, infrastructure is being created to enable an end-to-end RFID-enriched supply chain. RFID’s visibility-enhancing capabilities are exciting in an increasingly service-driven business environment.(half of the computer company’s revenue is from services). Equipment-capacity investment needs will diminish with better management of support resources; RFID technology could greatly reduce demand uncertainty, reducing the need for safety stock. Integration and security present obstacles to RFID’s development.
Gary Conkright of SmartSignal offered his company’s “reactive to proactive” approach to asset-health monitoring and prediction that is based on statistical pattern recognition. SmartSignal’s always-on, automatic troubleshooting system for mission-critical applications (power plants, fighter jets, etc.) could offset the cost of all scheduled maintenance by preventing failures through pre-emptive maintenance. Like Luke Gill and Daniel Connors, he said that improved asset reliability could reduce the number of stand-by machines customers needed, generating major cost savings as well as improving operational efficiency. He foresees asset monitoring becoming a significant part of the service sector.
Discussion opened with Ann Conkright’s observation that technologies such as RFID will have huge implications for “real-time, all-the-time” information being available to many players. Luke Gill noted that this opening-up of a closed system at LM posed a challenge: making plug-and-play, easy-access technology tamper proof and addressing competing security concerns among networked trading partners. Gary Conkright remarked that SmartSignal’s holistic view clarifies an asset’s relationships to everything around it, thereby modeling subtle but significant secondary effects.
Panel IV: Boeing’s Supply Chain Management Project for IDS Aerospace Support (moderated by Robert Salvucci, MCA Solutions)
Steven King noted that aircraft manufacturer Boeing’s customers are leading the shift from the company’s traditional “support value chain” to a new model, the “synchronized support chain.” There is more and more collaboration with both Boeing’s customers and its industry partners in order to provide the higher levels of service needed to remain competitive.
Jenny Thompson followed up, saying that although such systemic change did not come easily for either Boeing or its customers, they were engaged in a dynamic optimization process. Aerospace supply chains are notoriously hard to manage (multi-echelon, high-value inventory, variable lead time). Boeing IDS (Integrated Defense Systems) is in the first stage of a large-scale project to geneate breakthrough improvements. Early experiences have reinforced core lessons: the need to set metrics, establish win-win partnerships, use common processes and databases enterprise wide, employ scientific optimization tools for resource planning, and make substantial allowance for change management.
Discussion emphasized the importance of increased investment in service-support applications as fundamental to better service supply chain management. Participants agreed that this is a very expensive undertaking but that it is justified by the ROI. Service is increasingly driving value creation as the line between goods and services blurs, but measurement tools and processes have not kept pace.
Enterprises need a clearer picture of what their service activities cost vs. what they contribute. Only with this knowledge can organizations optimize pricing of their service products and plan strategically across product/service lines. Most companies today do not have integrated information systems that track activity-based costs in sufficient detail. Attendees agreed that this could seriously hinder the explosive growth of the new hybrid “service products.”
Conclusions and Questions
This Forum has brought together service supply chain management thought leaders from the public and private sectors and from academia. We have shared what we have learned so far as well as what we haven’t yet figured out. What progress have we made toward defining a truly service-centric business strategy? Do we now have a better understanding of how to create this? What are the cultural and operational challenges in doing so, and what are the opportunities that a service-centric strategy offers for transforming our enterprises in a complex, competitive world?
The solutions seem to be multifaceted: collaborative thinking coupled with organizational flexibility, sophisticated data analysis combined with technological advances, advanced optimization, and statistical algorithms. We look forward to our next meeting, at which we will continue this dialog.
Thanks to those who provided material for this report: Hau L. Lee, Morris Cohen, Sang-Hyun Kim, Diwas KC, and Marlene Petter.